The debt ceiling debate remains unresolved, but the intense focus on the issue makes one thing clear: Whatever the solution, the pain of living within our means will be most felt by consumers. The pot is only so big, and when we are in the mode of paying off debts, spending suffers.
The consumer is such a big part of the economy, so any reductions in spending are likely to have negative consequences for companies that cater to the consumer. Such is the price to be paid for the last decade or so of binge spending.
What consumer stocks should investors sell today?
Here are six candidates that, when plugged into my models, scream to be sold:
Carnival
Talk about a sinking ship. Carnival (NYSE:CCL) is a stock to be avoided in an environment of declining consumer spending. Already down 22% for the year, the cruise ship operator appears poised to give up more ground. Discretionary spending on cruising probably will evaporate as other expenses take a higher priority for most consumers.
Discounting fares heavily to keep cabins full will negatively impact earnings. At the same time, operating expenses are going up thanks to higher commodity prices. For now, the company has managed to keep pace with analyst expectations for profits, but that might change as early as the current quarter ending Aug. 31.
Shares currently trade for 15 times this year�s estimates for earnings. That is too high of a multiple for a company that easily could miss earnings in the near term. I would sell this stock if you have not already done so.
Sony
The flat-screen television boom is over. If you haven�t noticed, all the action in electronic devices happens to be in the smartphone or tablet computer markets. Sony (NYSE:SNE) is a nonfactor in both areas. Instead, the company must rely on Blu-ray disc players and its game consoles — currently PlayStation 3 and the PlayStation Portable — to drive revenue and profit growth. I don�t see that happening.
Sony shares have sunk 26% so far this year. The March earthquake and tsunami in Japan has had a negative impact on manufacturing in the country, making it difficult to get a handle on where earnings will go from here. I would avoid this stock until the dust settles in Japan. The end result still is unclear.
Panasonic
Another Japanese electronic manufacture facing similar challenges is Panasonic (NYSE:PC). Japan�s economy is in complete disarray since the earthquake and tsunami, but the real damage for companies like Panasonic have more to do with maturing markets for key products and the inability to replace those products with new and exciting growth items.
Ultimately, Panasonic is becoming more like a consumer cyclical company instead of an innovative growth engine. Shares of Panasonic are down 16% in 2011, but the stock still is priced like a growth story. For the current year ending March 31, 2012, the average Wall Street estimate for earnings is 54 cents per share. At current prices, Panasonic trades for 22 times forward earnings.
I�d rather see Panasonic with a 10 multiple or lower. That puts Panason! ic at a value of $5.40. This stock could lose another 50% in value from here.
Target
The recession and tepid recovery have greatly impacted the growth prospects of Target (NYSE:TGT). The consumer retailer with trendy products at low prices has been trumped by other retailers focusing on the bottom line. Efforts to adjust to the new reality have yet to prove Target can be the growth engine of years past.
Shares of Target are down 15% for the year as the consumer continues to struggle. The company beat earnings estimates in the last quarter, helping to keep losses this year at a minimum, but that trend is not likely to hold. More probable is earnings misses that could further depress shares. Analysts are looking for growth from this year to next at a very modest 6.5%.
With shares trading for 12 times current-year estimates, Target shares are likely to drift lower. I would be a seller of the stock at current prices.
Lowes
How low can Lowes (NYSE:LOW) go? The homebuilder sector still is a mess. Big-box hardware stores, including Lowes, are struggling to grow profits. The big-box model requires huge volume to generate profits that will meet investor expectations. If those volumes are not there, the model deteriorates. Lowes is down 10% this year and falling.
As a result of the selling, Lowes� dividend is a solid 2.4%. If you are interested in income, Lowes might be an interesting play, but I�m interested in growth and I�m not convinced Lowes can deliver profit acceleration in the current environment. The company m! issed es timates by 2 cents per share in the last quarter. I expect similar disappointment when the company releases results for the next quarter in a month or so.
Earnings estimates still are too high, with Wall Street expecting 15% profit growth from the current year to the next. My expectation is for 10% profit growth or worse. I would sell this stock, which now trades for 14 times current-year earnings estimates.
Anheuser-Busch InBev
One might think that with consumers struggling so badly, more people would drown their sorrows in alcohol. Beer and liquor sales tend to do well in a recessionary environment. As such, stocks like Anheuser-Busch InBev (NYSE:BUD) are defensive plays during difficult times.
The fly in the ointment of those buying Anheuser-Busch is inflation. We already have seen restaurant stocks like Chipotle Mexican Grill (NYSE:CMG) and Cheesecake Factory (NASDAQ:CAKE) deteriorate this quarter thanks to rising prices. Without the ability to pass that expense on to the consumer, profits suffer. Anheuser-Busch works well because of its low-priced beer. It will be difficult to increase prices to offset higher input costs.
With shares of Anheuser-Busch up 3.5% this year, now is the time to sell. The company missed analyst estimates by 5 cents per share the last time it reported results. This quarter, with higher inflationary pressures, the miss could be even larger. Anheuser-Busch is a consumer stock to sell now.
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